Rivlin's Shadow Panel Uses 1983 Tactic Against Deficit

October 21, 2010

As an appointee to the bipartisan commission tasked with reining in the deficit, Alice M. Rivlin is borrowing a tactic from Bob Dole and Daniel Patrick Moynihan

(Bloomberg) — Alice M. Rivlin, the grande dame of budget politics, is trying to pull off the Washington equivalent of a triple backflip off the high board. Appointed by President Barack Obama to the bipartisan commission named to recommend ways to rein in the runaway deficit, the 79-year-old says the group is paralyzed by politics six weeks before its report is due, Bloomberg Businessweek reports in its Oct. 25 issue.

The panel has all but taken Medicare, one of the biggest deficit drivers, off the table after the political battle over this year's health-care overhaul. Most Republican members are dead-set against tax increases, most Democrats have drawn a bright line around Social Security, and no serious negotiations are taking place while midterm-election fights are being waged. Rivlin is adopting a tactic that broke a similar stalemate in January1983, when the National Commission on Social Security Reform disintegrated in partisan bickering.

Then-Senator Daniel P. Moynihan, a New York Democrat, walked across the Senate floor to Republican Bob Dole of Kansas, the chairman of the Senate Finance Committee, and said: "Bob, we can't let things end this way," says Steve Bell, who was close to the discussions as the Budget Committee chief of staff. The two lawmakers then formed a rump group that met outside Congress and crafted a deal, which President Ronald Reagan signed into law three months later, to raise the cap on payroll taxes and the retirement age.

Republican Co-Chairman

Aiming for a repeat of history, Rivlin is leading what some call a shadow deficit commission with Bell's boss, former Senator Pete Domenici, a New Mexico Republican. It's sponsored by the Bipartisan Policy Center, a research organization started by former Democratic and Republican Senate majority leaders, and partially funded by the Rockefeller and Peterson foundations.

The commission meets regularly at the center's Washington office. Also on the panel are James Blanchard, a former Democratic governor of Michigan, and Donald Marron, director of the Congressional Budget Office in 2005, when Republicans still controlled Congress. They have joined 15 other budget hawks to devise a plan they hope will serve as a model if the president's commission deadlocks, as many predict it will.

The Obama panel, officially called the National Commission on Fiscal Responsibility and Reform, requires approval from 14 of its 18 members to recommend ways to balance the budget by 2015, excluding interest on the debt. The ad hoc group, which predates the real deficit commission, is working on a plan that will address the taboos the Obama commission is skirting, including raising taxes and cutting Social Security and Medicare, Rivlin says.

No Elected Officials

Making those tough choices is easier for her group, she says, because it counts no elected officials. "We are a similar-size group and also very dedicated to getting a solution," says Rivlin, a senior fellow at the Brookings Institution in Washington and a former Federal Reserve vice chairman. "The difference is none of us are running for public office." The official panel, led by former Senator Alan K. Simpson, a Wyoming Republican, and Erskine B. Bowles, former President Bill Clinton's chief of staff, has a Dec.1 deadline. Rivlin's group plans to unveil a proposal Nov.17, giving the official commission time to study it.

'Last-Minute Deliberations'

"We hope we can influence the last-minute deliberations the same way that the '83 commission looked like it would fall apart and came back together," says Bell, now a visiting scholar at the Bipartisan Policy Center. Bruce Reed, director of the Obama panel, denies it has given up on health care, yet agrees it will be tough. "It will be harder to reach a supermajority on that issue than on any other," he says.

By all accounts, the U.S. budget deficit is on an unsustainable path. It was $1.29trillion, or 8.9 percent of the total economy, in the 2010 fiscal year that ended Sept.30. Debt held by the public, now $9.2trillion, or 63percent of gross domestic product, is projected to reach $18.5trillion, or 78percent of GDP, by 2020, according to the Office of Management and Budget. Between 1960 and 2000, debt averaged 37percent of GDP.

Interest payments could reach $1trillion a year within a decade. Failure to address the debt could undermine would-be lenders' confidence that the U.S. government can make good on what it owes. That in turn may force the Treasury to borrow at higher interest rates, choking off growth and triggering a downturn that would bring greater unemployment, stagnant wages, and ever more debt.

Medicare No-Go

The shadow panel, Rivlin says, won't be afraid to sound the alarm. While Medicare is likely a no-go for the actual commission, she says her group will put it front and center. Medicare spending, at $519billion, or 3.6percent of GDP, this year, is projected to hit $929billion by 2020, the CBO says. Without any changes, it will be insolvent within seven years, Medicare trustees say.

"You can't solve the problem in any permanent sense without reducing the rate of health-care growth," Rivlin says. "That is the central issue." She says her parallel effort also will suggest cuts to Social Security. Spending for that program is projected to rise to about 6.2percent of GDP by 2035, when nearly all baby boomers will have retired, from about 4.8percent this year. Rivlin wouldn't offer specifics, while saying there is a "finite" list of options, including increasing the early retirement age, currently 62.

Earnings Cap

In a July21 article, Rivlin also argued for benefit reductions for high earners, along with raising the limit on earnings subject to the payroll tax, now at $106,800. One plan by Robert C. Pozen, chairman emeritus of MFS Investment Management in Boston, would base initial benefits on prices rather than wages, and could solve half the problem since wages historically rise faster than prices.

The president's panel may limit itself to making a recommendation about what to do with the Bush-era tax cuts that expire at the end of the year, says Ross K. Baker, a congressional expert at Rutgers University in New Brunswick, New Jersey. "It's a time-honored tradition when you've got an intractable problem to hand it over to a commission," he says. Getting anyone to listen to her group will be a tall order, Rivlin says.

Yet as an independent voice, it could provide political cover for unpopular solutions. "The cover of outside experts is important," says Chuck Blahous, a former economic aide to President George W. Bush and a public trustee for Social Security and Medicare. "Otherwise, you just wind up replicating the partisan divide in Congress." The shadow group sees its work as an example for Obama's commission, Rivlin says. "We think it'll be useful; we think it'll get attention."